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Expectations Hypothesis Tests in the Presence of Model Uncertainty

Author

Listed:
  • Erdenebat Bataa

    (Centre for Growth and Business Cycles Research, Economics, University of Manchester)

  • Dong H. Kim

    () (Department of Economics, Korea University and Economics, University of Manchester)

  • Denise R. Osborn

    (Centre for Growth and Business Cycles Research, Economics, University of Manchester)

Abstract

We extend vector autoregressive (VAR) model based expectations hypothesis tests of the term structure by relaxing some specification assumptions in order to reflect model uncertainty. Firstly, the wild bootstrap is used to allow for conditional heteroskedasticity of unknown form in the VAR residuals. Secondly, the model selection procedure is endogenized in the bootstrap replications and supplemented with a robust multivariate autocorrelation test. Finally, a stationarity correction is introduced to prevent the bias corrected VAR coefficients from becoming explosive. When the new methodology is applied to extensive US term structure data it emerges that the model uncertainty goes a long way in explaining the empirical rejections of the theory.

Suggested Citation

  • Erdenebat Bataa & Dong H. Kim & Denise R. Osborn, 2007. "Expectations Hypothesis Tests in the Presence of Model Uncertainty," Discussion Paper Series 0703, Institute of Economic Research, Korea University.
  • Handle: RePEc:iek:wpaper:0703
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    File URL: http://econ.korea.ac.kr/~ri/WorkingPapers/w0703.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    expectations hypothesis; term structure; wild bootstrap; conditional heteroskedasticity;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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